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19 IAS 33 - Presentation

IAS 33 outlines the principles for determining and presenting earnings per share (EPS) to enhance performance comparisons over time and between companies. It mandates that companies whose shares are publicly traded must present both basic and diluted EPS, even if negative. The document also details the calculation of basic EPS, the treatment of preference shares, and adjustments for events like bonus issues and rights issues that affect the number of shares outstanding.

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0% found this document useful (0 votes)
33 views26 pages

19 IAS 33 - Presentation

IAS 33 outlines the principles for determining and presenting earnings per share (EPS) to enhance performance comparisons over time and between companies. It mandates that companies whose shares are publicly traded must present both basic and diluted EPS, even if negative. The document also details the calculation of basic EPS, the treatment of preference shares, and adjustments for events like bonus issues and rights issues that affect the number of shares outstanding.

Uploaded by

Murtuza Haider
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IAS 33:

EARNINGS PER SHARE


Compiled by: Murtaza Quaid, ACA
IAS 33: EARNINGS PER SHARE

In this Part:
 Objective

 Why IAS 33 Earnings per Share?

 Requirement to present EPS

 Basic Earnings Per Share

 Dilute Earnings Per Share

 Other Considerations
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
IAS 33: EARNINGS PER SHARE

Objective

To prescribe principles for the determination and presentation of


earning per share to improve performance comparison:

Over time Between different companies

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Why IAS 33 Earnings per Share?

If an investor wants to purchase some shares on the stock exchange, then he probably
performs some analysis in order to select the right stock. Well, this is at least one should do.
In most cases, the investors, whether institutional or individual like you, look to a few
measures and one of them is P/E ratio.
The price-earnings ratio tells how many years of the same earnings an investor needs to
wait until he gets the price he paid for the shares back. When PE is 10, then investment into
certain share will theoretically return back in 10 years.
The formula for P/E Ratio = Market value per share / Earnings per Share (EPS)
Actually, the market value per share is available from the data on the stock exchange – not a
problem.
But what about the denominator – earnings per share?
The earnings per share usually come from the company’s financial statements. And, in order Investor
to make this amount reliable and comparable, we have the standard IAS 33 Earnings per
Share giving the guidance about how to present EPS.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Requirement to present EPS

 The following companies must present (1) Basic EPS and (2) Diluted EPS:
 Whose ordinary shares (or potential ordinary shares) are traded in a
public market (stock exchange), or
 Whose financial statements are filed or in the process of filing with a
securities commission or similar regulatory body for the purpose of
issuing the shares in a public market.

 Basic and diluted EPS must be presented even if the amounts are
negative (that is, a loss per share).

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share
Basic earnings per share is calculated simply as the
 Net profit or loss for the period attributable to ordinary shareholders, divided by
 Weighted average number of ordinary shares outstanding during the period.

Net profit / (loss) attributable to ordinary shareholders

Basic EPS =
Weighted average number of ordinary shares
outstanding during the period

An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. The
ordinary shares used in the EPS calculation are those entitled to the residual profits of the entity, after
dividends relating to all other types of shares have been deducted.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share

Net profit / (loss) attributable to ordinary shareholders

 Earnings attributable to ordinary shareholders usually means profit after tax LESS preference
dividend. The following guidance is relevant:
Preference shares Impact on calculation
 These shares are classified as liabilities.
Redeemable
 Any dividend relating to such shares is recognised as a finance cost in the statement of profit or loss.
preference shares  It is already deducted from the profit or loss and no further adjustment is required.
 These shares are classified as equity and the dividend relating to such shares is presented in the statement of
Irredeemable changes in equity.
preference shares  This dividend must be deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders.
 These are preference shares on which dividend, if not declared, shall be accumulated and be payable in
Cumulative subsequent period.
preference shares  The dividend on such shares is deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders, regardless that dividend is actually declared or not.
 These are preference shares on which dividend, if not declared, shall not be accumulated and shall not be
Non-Cumulative
payable in subsequent period.
preference shares  The dividend on such shares is deducted from profit only if declared during the year.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Preference Shares & Its Types

 Preference shares or in other words


preferred stock get preference over ordinary
shares. Like, company issuing preference
shares is required to pay dividend on such
shares before they offer even a penny to
ordinary shareholder before stock dividends
are issued.

 If the company bears bankruptcy, preference shareholders are entitled to be


paid from assets of the company before ordinary shareholders.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Types of Preference Shares

Participating and Non-participating Cumulative and Non-cumulative

 Participating preference share has an additional benefit


 Cumulative preference share – The dividends are
accumulated and therefore paid before anything paid to
of participating in profits of the company apart from the
equity shareholders.
fixed dividend.
 Non-participating preference share do not participate in
 Non-cumulative preference share – If company does not
pay dividend in current year, claim of preference share is
profits of the company apart from the fixed dividend.
lost to that extent.

Redeemable and Irredeemable Convertible and Non-convertible


 Redeemable preference share has a maturity date on  Convertible preference share posses an option or right
which date the company will repay the capital amount to whereby they can be converted into ordinary equity
the preference shareholder and discontinue the dividend shares at some agreed terms and conditions.
payment.  Non-convertible preference share simply does not have
 Irredeemable preference share does not have any this option but has all other normal characteristics of a
maturity date. The dividend of these shares is fixed. preference share.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share

Weighted average number of ordinary shares outstanding during the period

 For the purpose of calculating basic EPS, the number of ordinary shares shall be weighted average number of
ordinary shares outstanding during the period.
 The time-weighting factor is the number of days the shares were outstanding compared with the total
number of days in the period; a reasonable approximation is usually adequate. The weighted average
ordinary shares can be calculated as:
Number of ordinary shares outstanding × Time weighting factor × Adjustment factor (if any)
 The number of shares may increase or decrease during the year due to various reasons, including:
a) Issue of shares at full market price
b) Issue of shares for no consideration (bonus issue)
c) Share split (where one share is divided into several shares of smaller denomination)
d) Share consolidation (where two or more shares are consolidated into one share of larger denomination)
e) Right issue (with bonus element i.e. issue at below market price)

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share

Weighted average number of ordinary shares outstanding during the period

Issue of shares at full market price

 The weighted average ordinary shares are to be considered taking into account of the date any
new shares are issued during the year.
 Since the shares issued during the year and additional resources are provided only for part of
the year, therefore, new shares issued during the period are taken into account by applying a
time weighting factor.
 When shares are issued at full price, there is no adjustment required for previously held shares
or shares held during comparative periods.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

Bonus Issue - Issue of shares for no consideration


 A bonus issue of shares (also called a scrip issue, scrip dividend, specie dividend or a capitalisation issue) is an issue of new shares (instead of
cash) to existing shareholders, in proportion to their existing shareholding, for no consideration.
 The new shares are issued by converting equity reserves (e.g. share premium, retained earnings, etc.) into ordinary share capital.
 As no cash is raised from a bonus issue, the resources of the entity remain same. Thus, the bonus issue does not contribute to an entity’s
ability to earn additional earnings. However, as the number of shares is increased it reduces the per share earnings compared to when such
bonus shares were not issued. This might create a misleading impression as if the performance of the business has worsened, which might not
be the actual case.
 To avoid such misleading impression and to make EPS correctly comparable, bonus issue of shares are treated as if they have always been in
issue (i.e. in all previous years as well). This is achieved by applying an ‘adjustment factor’ to ordinary shares already in issue while
calculating weighted average number of shares outstanding.
Adjustment Factor = Number of shares after bonus issue .
Number of shares before bonus issue

For current year EPS For prior year EPS


 To calculate weighted average number of ordinary  The EPS of comparative periods is restated by either:
shares for current year EPS, multiply the number of  Multiply WANS in comparative period by the adjustment factor: or
shares before the bonus issue by adjustment factor
 Divide reported EPS in comparative period with the adjustment factor

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

Share Split
 Share split is the division of the existing issued share capital of a company into a larger number of shares but with smaller
denominations. The overall amount of capital remains the same.
 For example, a shareholder had 100 ordinary shares of Rs. 50 par value per share, that is total Rs. 5,000. The company
made a 5 for 1 share split. Now the shareholder would have 500 shares of Rs. 10 par value per share, that is same total of
Rs. 5,000.
 Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share split .
Number of shares before share split

For current year EPS For prior year EPS

 To calculate weighted average number of  The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply  Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
 Divide reported EPS in comparative period with the
adjustment factor
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

Share Consolidation
 Consolidation of shares, also known as reverse share split, results in smaller number of shares with larger denominations
affecting the total value of share capital.
 For example, a shareholder had 500 ordinary shares of Rs. 10 par value per share, that is total Rs. 5,000. The company
made a 1 for 5 share consolidation. Now the shareholder would have 100 shares of Rs. 50 par value per share, that is
same total of Rs. 5,000.
 Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share consolidation .
Number of shares before share consolidation

For current year EPS For prior year EPS

 To calculate weighted average number of  The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply  Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
 Divide reported EPS in comparative period with the
adjustment factor
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

Right Issue
 A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market
value. The offer of new share at a price below the current market value means that there is a bonus element
included.
 For example, a company ABC offers all its ordinary shareholders the right to purchase ONE ordinary share
for every FOUR ordinary shares that they hold, at 30% discount to the fair value (market price).
So imagine you have 1,000 shares in ABC and one share trades for Rs. 10 at the stock exchange. With this
offer, you can purchase additional 250 shares (ONE new for your FOUR existing; that is 1,000/4 = 250) at
30% discount – that is, at Rs. 7 per share.
Isn’t this nice? On the stock exchange, you would have to pay Rs. 10 x 250 = 2,500 for your 250 new
shares, but now, with the rights issue, you pay only Rs. 7 x 250 = 1,750.
From the ABC’s point of view, the increase in shares by 250 does NOT correspond to increase in resources –
these increase by Rs. 1,750 only, not by Rs. 2,500.
This is a bonus element and we must take this into account in our EPS calculation.
Note – if the offer was to purchase one for four shares at the market price, there is no complication as there
is no bonus element.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

Right Issue
 The issue price of the new shares in a rights issue is usually below the current market price and, in such a case, a bonus element exists in such
issue which must be adjusted i.e. an ‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average
number of shares outstanding.
Adjustment Factor = Fair value per share immediately before the exercise of rights (also called cum-rights price) .
Theoretical ex-rights price per share
 The two parameters of this formula:
 Fair value per share immediately before the exercise of rights – This is typically the market price per share immediately before it
becomes “ex-rights” – or, at the last day when the shares are traded together with the rights (“also called cum-rights”).
 Theoretical ex-rights price per share – This the expected price (in theory) at which the shares ought to be, in theory, after the rights
issue. It is computed as under:

Theoretical ex-rights price = (Shares before right issue x Cum-rights price) + (Right issue shares x Exercise price) .
Shares before right issue + Right issue shares

For current year EPS For prior year EPS


 To calculate weighted average number of ordinary  The EPS of comparative periods is restated by either:
shares for current year EPS, multiply the number of  Multiply WANS in comparative period by the adjustment factor: or
shares before the right issue by adjustment factor
 Divide reported EPS in comparative period with the adjustment factor
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period

 There might be various events affecting the number of shares outstanding during the year and we would classify them in
two groups:
Change in the number of ordinary shares

With corresponding change in resources Without corresponding change in resources


 When there has been an issue of new shares or a buy-  There are events in which there is a change in the
back of shares, the corresponding figures for EPS for number of ordinary shares without a corresponding
the previous year will be comparable with the current change in resources.
year because, as the weighted average of shares has  In these circumstances, it is necessary to make
risen or fallen, there has also been a corresponding adjustments to EPS reported in prior years so that the
increase or decrease in resources. current and prior period’s EPS figures become
 Money has been received when shares were issued, comparable.
and money has been paid out on the repurchased  The is achieved by adjusting the number of ordinary
shares. It is assumed that the sale or purchase has been shares outstanding before the event for the
made at full market price. proportionate change in the number of shares
outstanding as if the event had occurred at the
beginning of the earliest period reported.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share

Retrospective adjustments

Earnings Number of Ordinary Shares


 The basic (and diluted) EPS of all periods  The calculation of basic (and diluted) EPS for all
presented shall be adjusted for the effects of periods presented shall be adjusted retrospectively
errors and adjustments resulting from changes in (including the restatement of comparatives) as a result
accounting policies accounted for retrospectively of:
(in accordance with IAS 8).  Bonus issue
 Share split
 Share Consolidation (Reverse share split); or
 Right issue with bonus element
 IAS 33 requires this retrospective adjustment to the
number of ordinary shares even if changes in
shareholding structure occur after the reporting period
but before the financial statements are authorized for
issue. The fact that per share calculations reflect such
changes in the number of shares shall be disclosed.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share
Except for basic EPS, an entity must also disclose diluted EPS.
Why diluted EPS?
The reason is that the company might have issued some contracts or securities that are NOT the ordinary shares right now, but
CAN convert to them in the future, for example:
 Loans convertible into ordinary shares
 Convertible preference shares
 Share warrants and options
These instruments are called “Potential Ordinary Shares” & they can have two-fold impact on EPS:
 Earnings: They could be affected by saving some expenses on potential ordinary shares, for example, when some loan
converts to the shares, you stop paying the interest on that loan.
 Shares: Naturally, when the potential ordinary shares convert to ordinary shares, the number of shares goes up and it dilutes
the EPS.
In such circumstances, the future number of ordinary shares ranking for dividend might increase, which in turn results in a fall in the
EPS. In other words, a future increase in the number of ordinary shares will cause a dilution or 'watering down' of their earning,
and it is therefore, appropriate to calculate a diluted earnings per share i.e. the EPS that would have been obtained during the
financial period if the dilution had already taken place. This will indicate to investors the possible effects of a future dilution.

A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares (at some time
in the future). Potential ordinary shares do not impact calculation of basic EPS.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share
 Before you start calculating the diluted EPS, you need to determine whether the potential ordinary share is
dilutive or not:

Dilutive or Anti-dilutive Potential Ordinary Shares

Yes No
Dilutive Anti-dilutive

Include in diluted EPS Ignore


 They are considered in the calculation of diluted EPS.  They are disregarded in the calculation of diluted EPS.
 Dilution is a reduction in earnings per share or an  Anti-dilution is an increase in earnings per share or a
increase in loss per share resulting from the assumption reduction in loss per share resulting from the assumption
 That convertible instruments are converted;  That convertible instruments are converted;
 That options or warrants are exercised; or  That options or warrants are exercised; or
 That ordinary shares are issued upon the  That ordinary shares are issued upon the
satisfaction of specified conditions. satisfaction of specified conditions.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

Diluted earnings per share is calculated simply as the

 Adjusted Net profit or loss for the


period attributable to ordinary
shareholders,
For the effects of all
divided by dilutive potential
ordinary shares
 Adjusted Weighted average
number of ordinary shares
outstanding during the period.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

Post
Tax

Adjusted for
Net profit / (loss)  Dividend on convertible
preference shares.
attributable to ordinary
 Interest on convertible loan
shareholders / bonds etc.
Diluted
EPS = Adjusted for
Weighted average Number of  No of ordinary shares
ordinary shares outstanding issued on conversion of all
during the period dilutive potential ordinary
shares

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

 IAS 33 requires ignoring antidilutive shares – you just present the effect of dilutive shares.
How to measure diluted EPS?
 The formula for measuring diluted EPS is exactly the same as for basic EPS, but both earnings and
number of shares must be adjusted for the effect of dilutive potential ordinary shares.

Earnings Per Share


The effects of dilutive potential ordinary shares on earnings The number of ordinary shares is
could be: the weighted average number of
 Dividends on dilutive potential ordinary shares (e.g. ordinary shares calculated for
convertible preference share) basic EPS plus the weighted
 Interest on dilutive potential ordinary shares (e.g. average number of ordinary
convertible loan) – Net of tax; shares that would be issued on
the conversion of all the dilutive
potential ordinary shares into
ordinary shares.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

Potential Ordinary Shares


Following points need to be considered in connection with diluted EPS
1. Potential ordinary shares are weighted for the period they were outstanding.
2. If potential ordinary shares are issued during the reporting period, they are included in the computation of diluted EPS
only for the portion of the period during which they were outstanding i.e.
 from the actual date of issue of potential ordinary shares
 to the end of the reporting period
3. If potential ordinary shares are cancelled / lapsed / converted in ordinary shares during the reporting period, they are
included in the computation of diluted EPS only for the portion of the period during which they were outstanding i.e.
 from the beginning of the reporting period
 to the date of conversion; from the date of conversion,
4. The resulting ordinary shares are included in both basic and diluted EPS.
5. IAS 33 provides for use of most dilutive option when multiple conversion options are available. The computation
assumes the most advantageous conversion from the standpoint of the holder of the potential ordinary shares.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

Order of Dilution

 In determining whether potential ordinary shares are dilutive or antidilutive,


each issue or series of potential ordinary shares is considered separately rather
than in aggregate.
 The sequence in which potential ordinary shares are considered may affect whether they are
dilutive. Therefore, to maximise the dilution of basic earnings per share, each issue or series of
potential ordinary shares is considered in sequence from the most dilutive to the least dilutive, i.e.
dilutive potential ordinary shares with the lowest ‘earnings per incremental share’ are included in
the diluted earnings per share calculation before those with a higher earnings per incremental
share.
 Options and warrants are generally included first because they do not affect the numerator (i.e.
earnings) of the calculation.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share

Share Options or Warrants


1. Share options or warrants are financial instruments that give its holder, the right
to purchase ordinary shares.
2. Share options issued by an entity are also potential ordinary shares, and exercise
of such options will bring some resources to the business which may not dilute
the earnings.
3. However, if the option’s exercise price is less than average market price of the
period (i.e. the option is ‘in the money’), the option holders will get extra shares
for which entity’s resources will not be increased. These extra (or free) shares are
treated as dilutive because they will not contribute towards earnings but number of shares will be increased.
4. Free shares can be calculated as follows:
Free shares = Number of share options in issue x (Average market price during the period – Exercise price)
Average market price during the period
5. Diluted EPS will be calculated by adding these free shares in weighted average number of shares used in basic EPS calculation.
However, these will not impact earnings.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

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